A little rough

Strapped for cash, Tahera Diamond (TAH-T) is counting on a $30-million private placement from Teck Cominco (TCK.B-T, TCK-N) to help stem the tide while it attempts to right the underperforming Jericho diamond mine in Nunavut.

With final project costs coming in at a little over $122 million (compared with original estimates of $76.5 million), the Jericho mine was largely completed at the end of 2005 and proceeded through startup, commissioning and pre-operating phase during the first six months of 2006, achieving commercial production on July 1.

As a result, the third quarter of 2006 was the first quarter of commercial operations for the Jericho mine, but it has yet to operate at the nominal design production rate of 2,000 tonnes per day.

The company reported a net loss of $10.8 million (or 7 per share) in the third quarter, which represented the first period that Tahera began recognizing revenues from the sale of diamonds and the associated cost of goods sold. Under terms of an offtake and financing arrangement, high-end jeweller Tiffany & Co. (TIF-N) takes possession of Jericho’s entire run-of-mine production, from which it purchases a “significant” proportion for its own manufacturing and design needs. The remaining goods are sold by Tiffany, on Tahera’s behalf, on the international diamond market for a fee.

Tahera receives a substantial amount of the cash upfront but for accounting purposes it only recognizes revenue when title or ownership of the diamonds is transferred, so there can be quite a time lag between sights and when the goods are finally sold to a third party.

The company received cash proceeds of $8.6 million on diamonds produced during the quarter ended Sept. 30, of which $1.3 million was recognized as revenue. The remaining $7.3 million is deferred revenue and will likely be recognized in the fourth quarter.

Tahera, says it is still in the “learning phase” as to reaching standard operational practices. The plant averaged 1,700 tonnes per day, or 85% of capacity, during the third quarter. On a monthly basis, daily throughput was 1,750 tonnes for July and 1,850 tonnes for August, dropping to 1,500 tonnes for September.

“September was more due to downtime for equipment change outs,” says Dan Johnson, executive vice-president of operations. The original primary roll crusher, which had experienced excessive wear in the first three months of operation, was replaced and working by late September but several adjustments had to be made to the new crusher to avoid large-size material from reporting to the high-pressure grinding roll and restricting efficiency. Throughput during September was negatively affected by a greater dilution of granite rock resulting in higher recirculating loads, which restricts the process feed rate and causes higher plant downtime.

In general, there are different processing characteristics for the various rock types that require a metallurgical balancing of the plant. Tahera remains optimistic that it will reach the desired design level of 2,000 tonnes per day by the end of the year.

Discovered just south of Carat Lake in 1995, the Jericho kimberlite is a complex multi-phase, land-based pipe, with three major intrusive phases or lobes — South, North and Central — plus a precursor dyke (JDF2S) on the east side of the south end, each of which has a distinctive diamond distribution. A fifth phase, called JDF1, is identified as a xenolith-rich kimberlite of the North lobe.

The body is elliptical in shape, measuring 300 metres long and up to 100 metres wide. It is defined from surface, under only 10 to 20 metres of glacial cover, to a depth of at least 350 metres below surface by 133 drill holes totalling 28,000 metres. The pipe contains an indicated and inferred resource of 7.1 million tonnes averaging 0.84 carat per tonne, for almost 6 million carats.

The original feasibility study was prepared by SRK Consulting in 2000 and updated in May 2003. To further capture the project’s economic potential, SRK carried out a preliminary assessment in October 2004 of an alternate mine plan Tahera proposed based solely on an expanded, year-round open-pit operation without including the underground mining component, as was originally planned.

The revised mine plan calls for the production of some 4.7 million carats averaging $145 apiece over eight years of life, based on a pit model containing a 5.5-million-tonne resource grading 0.85 carat per tonne, at a life-of-mine stripping ratio of 5.2:1. Life-of-mine operating costs were pegged at $69 per tonne of processed kimberlite. Annual production is forecast at roughly 500,000 carats. About 18% of the production is derived from inferred resources.

In order to support an increased production rate of 680,000 tonnes per year (versus 330,000 tonnes in the 2003 feasibility study), the mine plan pushes the open pit 50% deeper to a depth of 270 metres by incorporating steeper slopes and additional pit pushbacks. Aggressive mine planning perimeters were used in the optimization and preliminary design, including increased pit-wall angles that result in overly steep pit slopes, states SRK in its 2004 preliminary assessment. SRK notes that the steepness of the walls, particularly that of the east and west walls, require further engineering work that will likely result in a pit that does not extend as deep as the preliminary design used in Tahera’s optimization plan. Should the pit ultimately be redesigned with flatter wall slopes, wider working benches and shallower ramps, the 5.2:1 stripping ratio will likely go higher.

From July to September, Jericho processed 157,000 tonnes and recovered 96,500 carats of rough diamonds, a 2% decline in carat production over the second quarter. While throughput was slightly higher than the 145,000 tonnes done in the previous preproduction quarter, the average grade of 0.62 carat per tonne slipped from 0.67 carat. Actual grades during the quarter were 0.72 carat per tonne for July, 0.62 carat for August and 0.47 carat for September.

The level of grade mined and processed to date is lower than expected and is being blamed by the company on an inability to mine higher-grade material. In the early part of the year, Tahera was forced into fuel-conservation mode after unseasonably warm weather disrupted and forced the early closure of the ice road used to supply many of the mines and exploration projects in Canada’s Arctic.

The Jericho mine is 420 km north-northeast of Yellowknife, N.W.T., and 170 km farther north of the Ekati diamond mine. The company received just 60% of its various allotments.

“We had to modify the mine plan as a consequence of not getting our full fuel fill and eventually that modification has led to our inability to process the higher-grade stuff,” acknowledges Peter Gillin, Tahera’s chairman and CEO. “We have processed lower-grade material in the course of that, both as part of the resource and material that was never included in the resource, in the upper benches of the kimberlite.”

The biggest impact to the mine plan was the deferral of waste stripping, and as a result, the company has been unable to mine and stockpile kimberlite at the rate it had originally expected. An inability to fast-track a greater portion of higher-grade material from the Central zone has contributed to lower-than-planned grades.

“We have fuel that we estimate will take us through late January-early February, which coincides with a normal winter road opening date, so what additional fuel we do expect to fly in will be quite minor,” says Johnson, who expects to fly in less than 1 million litres of fuel on the outside case.

So far this year, Tahera has recovered 220,418 carats from the treatment of 365,000 tonnes of kimberlite grading 0.61 carat per tonne. Of the material processed to date, about 35% has been mined from the lower-grade JDF1 and South lobes, 26% from the higher-grade Central lobe and the remaining 39% from additional kimberlite not in the resource model. The grade of this extra materi
al is estimated to be 0.53 carat per tonne. Tahera warns that it may encounter “extra material” as it exposes the North lobe of the Jericho pipe, which will be mined and processed in the fourth quarter.

The contact between kimberlite and overburden, and in the upper portion of the kimberlite above the angled delineation drill holes, is the least constrained part of the pit model. As the pit deepens, Tahera expects the kimberlite tonnages will more accurately reflect model grades.

The diamond prices predicted in Tahera’s 2004 economic evaluation rely on a comprehensive 2003 diamond valuation analysis by WWW International Diamond Consultants, and a September 2004 WWW market review that includes a forecast of the expected price trend for rough and polished diamonds through to 2013.

A 10,526-carat lot re-examined by WWW was estimated to have an average value of US$66 per carat in 2003. As stated in an earlier 1999 report, WWW believed Jericho’s value to be understated and assumed that the better-quality, larger diamonds “that were absent in the samples will be recovered in production.” WWW applied modelled values of US$94 per carat for the Centre and JDF2S lobes, and US$75 per carat for the North, South and JDF1lobes.

In its base case scenario, Tahera used higher modelled values of US$103 per carat for the Centre and DF2S lobes, and US$82 per carat for the North, South and JDF1 lobes for the first year of production based on a projected 10% increase over WWW’s 2003 modelled prices. Beyond 2006, Tahera assumed diamond prices would escalate 3% annually.

The value of production for the third quarter was $10.3 million for an average of $107 per carat (or $66 per tonne processed). The total weighted average value for both pre- and post-commercial production to Sept. 30, 2006, is $105 per carat.

“The diamond values generally met our expectations,” says Gillin. “Our actual run-of-mine results are very close to the model distribution. We are getting an attractive distribution of all sizes, including some attractive large stones.”

In the second quarter, Tahera announced the recovery of a 59-carat gemstone worth more than US$400,000. “We haven’t obviously found a stone bigger or more valuable than that as of yet, but we do regularly find stones in the 10.8-carat plus range that do match the quality,” explains Johnson.

Two of the biggest diamonds recovered so far are two lower-quality stones weighing 101 and 103 carats, which were originally part of a much larger octahedral diamond of more than 200 carats.

The rough diamond market over the course of the summer has been soft, notes Gillin, who considers the medium- and long-term outlook to be very favourable.

Costs of production for the 3-month period ended Sept. 30 totalled $19.5 million, which includes $5.9 million of amortization and depletion of mining assets. The cash operating cost was $138 per carat for the third quarter.

“We are reviewing our entire cost structure, obviously with a view of reducing costs wherever we possibly can,” stresses Gillin, who notes that fuel and supplies comprise a significant element of the costs. Going forward, cash operating costs (excluding amortization and depletion) are expected to settle between $95 and $105 per carat for 2007, assuming daily throughput levels of 2,000 to 2,200 tonnes are processed per day. A second mining shift was added in September.

“As a result of the lower-grade realizations and lower throughput we experienced in the quarter, our cash flow from operations was less than we had anticipated, consequently we initiated financing discussions to determine how we might fund our re-supply requirements in the first quarter of 2007,” Gillin says.

Fuel and other bulk supplies, such as explosive material, is bought at this time of the year in order to use the winter ice road from Yellowknife. These costs are around $10 to $15 million.

At the end of the third quarter, Tahera held $10.9 million in cash and equivalents, but its working capital was at a deficit of $8.4 million.

The new money from Teck Cominco will see the major acquire an initial 16% interest in Tahera by buying 30 million units for $1 apiece. The units comprises 30 million shares and three tranches of warrants totalling 22.1 million warants exercisable at $1.20, $1.35 and $1.50 in years one, two and three, respectively.

“It’s going to put (our) company in very solid financial condition,” says Gillin. “Not only does it provide us with obvious financial support in our current circumstances, but we have agreed to a technical and mining advisory arrangement with Teck. We think this assistance will be quite valuable in the further development and operations of the Jericho diamond mine.”

Teck Cominco may also nominate one director to Tahera’s board as long as their shareholding stays at 10% or more.

In light of the above deal, Tiffany & Co., which is Tahera’s principal creditor, will defer a year’s worth of scheduled repayments on a five-year, $35-million loan until Sept. 30, 2007, at which time the amounts owed will be amortized equally over the ensuing 15 quarters. As compensation for the deferral arrangement, Tiffany has been given the marketing rights to any future production from the exploration-stage Muskox project, 14 km southwest of Jericho.

Muskox

The Muskox kimberlite pipe is an elliptical body measuring 200 by 215 metres at surface and covering 3.5 hectares; it’s part of the neighbouring Polar joint venture with De Beers, in which Tahera has earned a 50% interest by spending more than $11 million on exploration.

Should Muskox or any of the other Polar kimberlites prove economic, Tahera will remain as operator of development projects valued at less than $750 million and have a right to boost its stake to 75% by making certain payments. Conversely, for projects exceeding $750 million, De Beers will have the right to assume operatorship and increase its ownership to 70%.

Tahera is eyeing Muskox’s potential to serve as supplemental feed and extend the life of the Jericho mine. Last winter, Tahera used a large-diameter reverse-circulation (RC) rig to collect a 928-tonne bulk-sample from the pipe to assess the diamond grade and value.

Before the 2006 program, the Muskox pipe was modelled to contain somewhere in the neighbourhood of 12.3 to 16.3 million tonnes of kimberlite to a depth of 300 metres. The pipe has two major phases: hypabyssal magmatic kimberlite (called unit A) and volcaniclastic kimberlite breccia (unit B), with each aligned vertically and roughly equal in volume.

De Beers assessed Muskox in the late 1990s and found a preliminary grade of 0.36 carat per tonne using 47 tonnes of drill core and RC samples. De Beers’ mini-bulk sample consisted of roughly 75% unit A and 25% unit B. After optioning the project, Tahera stuck four holes into the pipe in 2005 that returned elevated diamond counts and gave indications that unit A’s grade may be understated.

Thus, a strong emphasis was put on further evaluating unit A, from which 865 tonnes were extracted this past winter. Of the eight large-diameter holes completed, seven holes tested unit A to 305 metres depth and one hole tested unit B. In total, 455.3 carats of rough diamonds exceeding 0.85-mm were recovered from unit A, for a grade of 0.53 carat per tonne. The grade in each of the seven holes ranged from 0.46 to 0.62 carat per tonne.

“That grade is better than what the original De Beers work had indicated, however, it was below the modelled grades that the Mineral Services (Canada) analysis had suggested,” says Gillin.

Another 63 tonnes collected from unit B returned 21.8 carats, for a grade of 0.35 carat per tonne.

An evaluation will be done on the recovered parcel of diamonds. The results should be available in the early part of 2007 and will determine how Tahera proceeds going forward on the Muskox pipe.